Clause 398 Consequences of failure to deduct or pay or, collect or pay.

Income Tax Bill, 2025

Introduction

Clause 398 of the Income Tax Bill, 2025 represents a significant legislative development in the domain of tax deduction and collection at source (TDS/TCS) within the Indian Income Tax framework. It seeks to consolidate, clarify, and modernize the consequences of failure to deduct, collect, or pay tax as required under the proposed Act. This provision must be analyzed in the broader context of the existing legal regime, particularly Section 206C of the Income-tax Act, 1961 and the procedural rules, notably Rule 37J of the Income-tax Rules, 1962, which collectively govern the mechanism, compliance, and consequences associated with TDS/TCS defaults.

This commentary undertakes a detailed, provision-wise analysis of Clause 398, juxtaposes it with the operative framework u/s 206C and Rule 37J, and explores the implications, policy rationale, and practical considerations for stakeholders. The analysis also highlights areas of continuity, reform, and potential ambiguity, thereby providing a comprehensive understanding of the legislative evolution and its practical impact.

Objective and Purpose

The legislative intent behind Clause 398 is to establish a clear, robust, and equitable framework for addressing failures in tax deduction or collection at source. The provision aims to:

• Ensure prompt and accurate collection of tax revenue at the source of income or transaction.
• Prescribe consequences (including being deemed as 'assessee in default', interest liability, and asset charge) for non-compliance, thereby acting as a deterrent.
• Provide relief in genuine cases where the deductee/collectee has fulfilled their tax obligations, thus preventing double taxation and undue hardship.
• Streamline procedural aspects, including time limits for passing orders and the interplay with penalty provisions.

Historically, the regime u/s 206C and related TDS/TCS provisions has evolved to balance revenue interests with taxpayer fairness. Judicial pronouncements and administrative experience have informed the need for clarity, procedural safeguards, and proportionality in enforcement-objectives that Clause 398 seeks to further.

Detailed Analysis of Clause 398 of the Income Tax Bill, 2025

Sub-section (1): Deeming Provision - Assessee in Default

Clause 398(1) provides that any person (including the principal officer of a company) who is required to deduct or collect tax under the Act and fails to do so, or after deducting/collecting fails to pay the tax, shall be deemed an "assessee in default" in respect of such tax. This is in addition to any other consequences under the Act.

Interpretation and Scope:

• The provision covers both deduction (TDS) and collection (TCS) obligations, as well as payment failures after deduction/collection.
• The deeming fiction ensures that the default triggers not just recovery but also other penal and interest consequences under the Act.
• The inclusion of the "principal officer" extends liability to key managerial personnel, reinforcing accountability within corporate structures.

Ambiguities and Issues:

• The phrase "as required by or under this Act" necessitates careful compliance with both substantive and procedural TDS/TCS provisions.
• Overlap with other penal provisions may arise, but the clause clarifies that this is "in addition to" other consequences.

Sub-section (2): Relief from Default - Payee Compliance

Clause 398(2) introduces a crucial exception: a person failing to deduct or collect tax shall not be deemed an assessee in default if the payee/buyer/licensee/lessee has:

1. Furnished their return of income u/s 263;
2. Taken into account the relevant amount for computing income;
3. Paid the tax due on such income;
4. And the deductor/collector furnishes a certificate from an accountant in the prescribed form.

Interpretation and Scope:

• This relief is available only if all conditions are cumulatively satisfied, ensuring that revenue is not prejudiced.
• It mirrors the rationale of preventing double taxation and aligns with principles of equity recognized by courts (e.g., Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT).
• The requirement of an accountant's certificate (akin to Form 27BA u/r 37J) introduces a compliance safeguard, ensuring due diligence.

Ambiguities and Issues:

• The practical challenge lies in obtaining timely and accurate certificates, especially in large-scale or complex transactions involving multiple deductees/collectees.
• The provision does not expressly clarify the consequences if the certificate is delayed or found defective.

Sub-section (3): Interest Liability

Clause 398(3) imposes a two-tier interest liability:

• 1% per month (or part thereof) from the date tax was deductible/collectible to the date it is actually deducted/collected.
• 1.5% per month (or part thereof) from the date of deduction/collection to the date of actual payment to the government.

Interest must be paid before furnishing the relevant statement u/s 397(3)(b). If the deductor/collector is not deemed in default under sub-section (2), interest is payable only up to the date of the payee's return filing.

Interpretation and Scope:

• The bifurcation of interest rates reflects the gravity of default-higher interest for failure to pay after deduction/collection, as this constitutes holding government funds.
• The provision for interest up to the date of payee's return (in case of relief) is consistent with the principle that the government is deprived of timely revenue.
• The requirement to pay interest before statement filing aligns with the objective of prompt compliance and accurate reporting.

Ambiguities and Issues:

• The computation of interest in cases of partial deduction/collection or multiple payees may present practical difficulties.
• There is potential for dispute regarding the exact period for which interest is payable, especially in cross-border or multi-jurisdictional transactions.

Sub-section (4): Charge on Assets

This provision creates a statutory charge on all assets of the defaulting person for the unpaid tax and interest.

Interpretation and Scope:

• This enhances the revenue's ability to recover dues by prioritizing tax claims over other unsecured creditors.
• It reinforces the seriousness of TDS/TCS defaults, especially in insolvency or liquidation scenarios.

Ambiguities and Issues:

• The interaction with the Insolvency and Bankruptcy Code, 2016 and other secured creditors' rights may warrant judicial interpretation.

Sub-section (5): Time Limitation for Passing Default Orders

No order deeming a person as assessee in default can be made:

• After six years from the end of the tax year in which tax was deductible/collectible; or
• After two years from the end of the tax year in which a correction statement is delivered u/s 393(3)(f), whichever is later.

Interpretation and Scope:

• This introduces a clear limitation period, providing certainty and finality to taxpayers.
• The linkage to correction statements recognizes the dynamic nature of TDS/TCS compliance and reporting.

Ambiguities and Issues:

• The definition and scope of "correction statement" and its triggering events will be critical for practical application.
• Transitional cases (pre- and post-enactment) may require administrative clarification.

Sub-section (6): Application of Sections 286(1) and 286(3)

This cross-references other sections relating to the computation of limitation periods, suggesting that exclusions or extensions (such as periods of stay, reassessment, etc.) under those provisions will apply mutatis mutandis.

Sub-section (7): Penalty Safeguard

No penalty u/s 412 shall be imposed unless the Assessing Officer is satisfied that the default was without good and sufficient reasons.

Interpretation and Scope:

• This codifies the principle of reasonable cause, ensuring that penalties are not imposed mechanically or in cases of bona fide error or hardship.
• It aligns with judicial pronouncements emphasizing the need for a reasoned, discretionary approach to penalty imposition.

Practical Implications

Clause 398, if enacted, will have far-reaching implications for businesses, employers, and other persons subject to TDS/TCS obligations:

• Compliance Complexity: The detailed conditions for relief, interest computation, and asset charge necessitate robust internal controls, timely reconciliation, and documentation.
• Risk Management: The statutory charge and deeming fiction heighten the risk for non-compliance, especially for companies and their officers.
• Procedural Safeguards: The limitation period and penalty safeguard provide much-needed certainty and protection against arbitrary or delayed enforcement.
• Coordination with Deductees/Collectees: The exception for payee compliance requires effective communication and coordination, particularly in large organizations or transactions with numerous counterparties.

Comparative Analysis with Section 206C of the Income-tax Act, 1961

Section 206C deals with the collection of tax at source on specified transactions (e.g., sale of liquor, forest produce, scrap, minerals, motor vehicles, overseas remittance, etc.) and prescribes the mechanism, rates, and compliance requirements. The key comparative points are as follows:

1. Deeming Assessee in Default

• Section 206C(6A): The provision deems a person responsible for collecting tax as an assessee in default if he fails to collect or, after collecting, fails to pay the tax. The first proviso grants relief where the buyer/licensee/lessee has furnished their return, taken the income into account, and paid tax, subject to an accountant's certificate.
• Clause 398(1)-(2): The new clause mirrors this structure but extends it to both deduction and collection, and references the new sections and forms under the Bill.

Observation: The framework and rationale are substantially similar, with Clause 398 representing an updated, consolidated approach.

2. Interest Liability

• Section 206C(7): Imposes interest at 1% per month from the date tax was collectible to the date it is collected, and 1.5% per month from collection to payment.
• Clause 398(3): Replicates these rates and periods; also provides for interest up to the date of return filing in cases where relief is granted under the payee compliance exception.

Observation: The substantive liability is unchanged, but the procedural integration and clarity are improved under Clause 398.

3. Limitation Period

• Section 206C(7A): Bars passing of default orders after six years from the end of the financial year in which tax was collectible, or two years from the end of the year in which the correction statement is filed, whichever is later.
• Clause 398(5): Adopts the same limitation framework, with references to the new sections in the Bill.

Observation: The limitation period is a significant taxpayer safeguard, and its continuity is welcome.

4. Statutory Charge on Assets

• Section 206C(8): The unpaid tax and interest become a charge on all assets of the person responsible for collecting tax.
• Clause 398(4): Directly parallels this provision, ensuring continuity of the revenue's security interest.

5. Penalty Safeguard

• Section 206C(6A) (second proviso): No penalty unless the Assessing Officer is satisfied that the default was without good and sufficient reasons.
• Clause 398(7): Repeats this safeguard, reflecting the principle of proportionality and fairness.

6. Procedural and Compliance Aspects

• Section 206C(6A) & Rule 37J: Relief from default is contingent upon the furnishing of an accountant's certificate in the prescribed form (Form 27BA), as governed by Rule 37J.
• Clause 398(2): Requires a certificate in the prescribed form, which is likely to be governed by corresponding rules under the new Act, but the substance is unchanged.

Observation: The procedural safeguard for preventing double taxation and ensuring due process is retained.

Rule 37J of the Income-tax Rules, 1962: Procedural Nexus

Rule 37J operationalizes the relief provision by prescribing Form 27BA for the accountant's certificate, to be furnished electronically to the Director General of Income-tax (Systems). The Rule empowers the DGIT (Systems) to specify procedures, formats, and standards for submission and verification.

Practical Considerations:

• Rule 37J is critical for the effective functioning of the relief provision, as it ensures standardization, traceability, and auditability of compliance.
• The electronic filing and verification procedures minimize administrative delays and errors, but also require technological readiness and awareness among taxpayers and professionals.
• Any transition to a new Act will require corresponding rules to be notified, but the underlying mechanism is expected to remain similar.

Unique Features and Potential Conflicts

While Clause 398 substantially aligns with the existing regime u/s 206C and Rule 37J, certain unique features and potential issues merit attention:

• Comprehensive Scope: Clause 398 appears to consolidate provisions applicable to both TDS and TCS, potentially reducing fragmentation and confusion.
• Modernization: The cross-referencing to electronic statements, correction statements, and prescribed forms reflects an adaptation to digital compliance realities.
• Potential Conflicts: The statutory charge on assets and interest liability may interact with other laws (e.g., insolvency, company law), necessitating careful harmonization and possible judicial interpretation.
• Procedural Nuances: The effectiveness of relief provisions depends on timely, accurate, and accessible certification procedures, which may require continuous administrative oversight and stakeholder education.

Conclusion

Clause 398 of the Income Tax Bill, 2025, represents a thoughtful consolidation and modernization of the law governing consequences of failure to deduct, collect, or pay tax at source. By largely retaining the substantive framework of Section 206C(6A), (7), (7A), and (8) and integrating the procedural safeguards of Rule 37J, the clause ensures continuity, administrative efficiency, and fairness. The provision's broad scope, detailed relief mechanism, and clear time limits are likely to enhance compliance, reduce litigation, and secure government revenue, while also providing necessary safeguards against undue penalization. Nevertheless, certain ambiguities-particularly regarding the standard for "good and sufficient reasons" and practical challenges in obtaining accountant certification-may warrant further clarification, whether through judicial interpretation or administrative guidance. As the new code is implemented, close attention to stakeholder feedback and evolving jurisprudence will be essential to ensure the clause achieves its intended objectives without imposing undue hardship or uncertainty.

Full Text:

Clause 398 Consequences of failure to deduct or pay or, collect or pay.